DRAMATIC TAX CHANGES FOR 2022 AND 2023
Notably absent from 2022 Federal legislation are business tax provisions such as modifications to IRC Section 163(j) (business interest limitation) or relief from the IRC Section 174 research and experimental (development) amortization requirement, two of the Tax Cuts and Jobs Act (TJCA) cliffs (tax cut expirations) that took effect this year. Also missing are an expanded Child Tax Credit and changes (renewals) to other business and personal tax provisions.
RESEARCH AND EXPERIMENTAL EXPENSES
Starting January 1, 2022, research and experimental (also known as R&E or R&D) expenses are required to be amortized (½ year of amortization is allowed for the first year) over a five-year period for domestic research and fifteen years for foreign research. Note the five-year capitalization rule also applies to software development costs. There is no early write-off for abandoned, disposed, or retired R&E permitted, full amortization is required. For the first time since 1954, companies are no longer able to immediately expense their R&E costs. Taxable income will be increased compared to financial income since R&E is expensed for books but capitalized for tax.
A relatively unknown item is the availability in 2023 (double the 2022 amount) of up to $500,000 yearly, a $2.5 million maximum federal R&E payroll tax credit for a Qualified Small Business. A Qualified Small Business (QSB) has less than five million gross receipts for the current tax year and is allowed gross receipts for the five-year period ending with the tax filing year but has no gross receipts for a tax year that is six years previous or older than six years previous to the tax filing year. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward for up to twenty years.
The temporary allowance of a 100% deduction for restaurant business meals for 2022 reverts to 50% for 2023.
For 2022, the non-itemized deduction (maximum of $600 for married filing joint, $300 for single filing) for cash charitable contributions is discontinued, taxpayers must now itemize to deduct charitable contributions.
The AGI percentage limitation for charitable contributions is back into play for 2022 as charitable contributions are limited to 60% (down from 100% for 2021) of Modified Adjusted Gross Income and 30% (unchanged from 2021) for non-cash contributions.
The 100% bonus depreciation changes effective January 1, 2023, and the first-year bonus depreciation deduction generally decreases as follows:
- 80% for property placed in service during 2023
- 60% for property placed in service during 2024
- 40% for property placed in service during 2025
- 20% for property placed in service during 2026.
BUSINESS INTEREST DEDUCTIONS
Many business tax returns and an even larger number of real estate projects will experience Section 163(j) limitations on net business interest deductions for the first time when filing their 2022 tax returns.
Starting January 1, 2022, Section 163(j) limitation changes the earnings calculation when computing the 30% allowed interest. The earnings calculation is changed to earnings before interest and taxes (EBIT) instead of earnings before interest, taxes, depreciation, and amortization (EBITDA).
The deduction limit on business interest does not apply to businesses with prior 3-year average gross receipts of $27 million or less for 2022 and $29 million prior three-year average or less for 2023. The limitation also does not apply to deductions for interest paid by vehicle dealers on carried inventory. In addition, some real estate-related businesses can opt out of the limitation if they forego accelerated depreciation. Interest that cannot be deducted due to the limitation is carried forward indefinitely.
In 2023, there are moderate chances of the business tax provisions and the expanded Child Tax Credit being extended. Anything can happen in Washington, and sometimes nothing is passed or changed.
PKF Mueller will keep you posted on any future tax changes.
For more information, please contact:
Kathleen F. Parzynski, CPA, MST
+1 847 649 8810
Kelly Jordan, CPA, Jurisprudence In International Tax Law, MBA, MBA, CFS, CITA, CTPS
+1 847 350 1504